Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended July 31, 2014

OR

o

Transition report under Section 13 or 15(d) of the Exchange Act.

For the transition period from to .

COMMISSION FILE NUMBER 000-51825

HERON LAKE BIOENERGY, LLC

(Exact name of Registrant as specified in its charter)

Minnesota

41-2002393

(State or other jurisdiction of organization)

(I.R.S. Employer Identification No.)

91246 390th Avenue, Heron Lake, MN 56137-1375

(Address of principal executive offices)

(507) 793-0077

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ýYes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý

(Do not check if a smaller reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ý No

As of September 15, 2014, there were 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding.

The accompanying unaudited condensed consolidated interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted as permitted by such rules and regulations. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s audited financial statements for the year ended October 31, 2013, contained in the Company’s annual report on Form 10-K.

In the opinion of management, the condensed consolidated interim financial statements reflect all adjustments consisting of normal recurring accruals that we consider necessary to present fairly the Company’s results of operations, financial position and cash flows. The results reported in these condensed consolidated interim financial statements should not be regarded as necessarily indicative of results that may be expected for any other quarter or for the fiscal year.

Nature of Business

The Company owns and operates an ethanol plant near Heron Lake, Minnesota with a permitted capacity of approximately 59.2 million gallons per year. In addition, the Company produces and sells distillers grains with solubles and corn oil as co-products of ethanol production. Additionally, the Company, through a majority owned subsidiary, operates a natural gas pipeline that provides natural gas to the Company's ethanol production facility.

Principles of Consolidation

The financial statements as of July 31, 2014 include the accounts of Heron Lake BioEnergy, LLC and its wholly owned subsidiary, HLBE Pipeline Company, LLC, collectively the "Company." HLBE Pipeline Company, LLC owns 73% of Agrinatural Gas, LLC (“Agrinatural”). Given the Company’s control over the operations of Agrinatural and its majority voting interest, the Company consolidates the financial statements of Agrinatural with its consolidated financial statements, with the equity and earnings (loss) attributed to the remaining 27% noncontrolling interest identified separately in the accompanying Consolidated Balance Sheets and Statements of Operations.

The financial statements as of October 31, 2013 include the accounts of the Company's formerly wholly owned subsidiary, Lakefield Farmers Elevator, LLC. Lakefield Farmers Elevator, LLC sold substantially all of its assets during the second quarter of 2013.

All significant intercompany balances and transactions are eliminated in consolidation.

Accounting Estimates

Management uses estimates and assumptions in preparing these financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. The Company uses estimates and assumptions in accounting for significant matters including, among others, the analysis of impairment of long-lived assets and valuation of commodity forward contract commitments and inventory. The Company periodically reviews estimates and assumptions, and the effects of revisions are reflected in the period in which the revision is made. Actual results could differ from those estimates.

Amounts recorded as noncontrolling interest on the balance sheets relate to the net investment by an unrelated party in Agrinatural. Income and losses are allocated to the members of Agrinatural based on their respective percentage of membership units held. Agrinatural will provide natural gas to the plant with a specified price per MMBTU for an initial term of 5 years expiring October 31, 2016, with two renewal options for 5 year periods. On July 1, 2014, the Company entered into amendment of its natural gas transportation agreement dated May 13, 2011 with Agrinatural in which the Company agreed on an early exercise of one of the two automatic five-year term renewals thereby extending the term of the transportation agreement to October 31, 2021.

The Company previously declared a distribution to noncontrolling interest members for approximately $85,000. This amount was recorded within accrued expenses at October 31, 2013. During the six month period ended April 30, 2014, the Company canceled this distribution.

Revenue Recognition

Revenue from sales is recorded when title transfers to the customer, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists, and the sales price is fixed or determinable. The title transfers when the product is loaded into the railcar or truck, the customer takes ownership and assumes risk of loss.

In accordance with the Company's agreements for the marketing and sale of ethanol and related products, marketing fees and commissions due to the marketers are deducted from the gross sales price as earned. These fees and commissions are recorded net of revenues as they do not provide an identifiable benefit that is sufficiently separable from the sale of ethanol and related products. Shipping costs incurred by the Company in the sale of ethanol are not specifically identifiable and as a result, are recorded based on the net selling price reported to the Company from the marketer. Shipping costs incurred by the Company in the sale of ethanol related products are included in cost of goods sold.

2. RISKS AND UNCERTAINTIES

The Company has certain risks and uncertainties that it experienced during volatile market conditions. These volatilities can have a severe impact on operations. The Company’s revenues are derived from the sale and distribution of ethanol and distillers grains to customers primarily located in the U.S. Corn for the production process is supplied to the plant primarily from local agricultural producers. Ethanol sales average 70% -80% of total revenues and corn costs average 70%-90% of cost of goods sold.

The Company’s operating and financial performance is largely driven by the prices at which it sells ethanol and the net expense of corn. The price of ethanol is influenced by factors such as supply and demand, the weather, government policies and programs, unleaded gasoline prices and the petroleum markets as a whole. Excess ethanol supply in the market, in particular, puts downward pressure on the price of ethanol. The largest cost of production is corn. The cost of corn is generally impacted by factors such as supply and demand, the weather, government policies and programs, and a risk management program used to protect against the price volatility of these commodities. Market fluctuations in the price of and demand for these products may have a significant adverse effect on the Company’s operations, profitability and the availability and adequacy of cash flow to meet the Company’s working capital requirements.

As of July 31, 2014, the total notional amount of the Company’s outstanding corn derivative instruments was approximately 3,450,000 bushels that were entered into to hedge forecasted corn purchases through May 2015. There may be offsetting positions that are shown on a net basis that could lower the notional amount of positions outstanding as disclosed above.

The following tables provide details regarding the Company’s derivative instruments at July 31, 2014, none of which are designated as hedging instruments:

Balance Sheet location

Assets

Liabilities

Corn contracts

Commodity derivative instruments

$

—

$

85,487

The Company did not have any outstanding derivative positions at October 31, 2013.

The following tables provide details regarding the gains and losses from Company’s derivative instruments in statements of operations, none of which are designated as hedging instruments:

Statement of

Three Months Ended July 31,

Operations Locations

2014

2013

Corn contracts

Cost of goods sold

$

(125,461

)

$

—

Statement of

Nine Months Ended July 31,

Operations Locations

2014

2013

Corn contracts

Cost of goods sold

$

206,744

$

—

5. FAIR VALUE

The following table provides information on those derivative liabilities measured at fair value on a recurring basis at July 31, 2014:

Fair Value Measurement Using

Financial Liabilities:

Carrying Amount in Balance SheetJuly 31, 2014

Quoted Prices in Active Markets(Level 1)

Significant Other Observable Inputs(Level 2)

Significant unobservable inputs(Level 3)

Commodity derivative instruments

$85,487

$85,487

$—

$—

The Company did not have any assets or liabilities measured at fair value on a recurring basis at October 31, 2013.

HLBE determines the fair value of commodity derivative instruments by obtaining fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes and live trading levels from the Chicago Board of Trade market and New York Mercantile Exchange.

The Company had a term loan with AgStar Financial Services, FCLA ("AgStar"). The Company was making equal monthly payments of principal and interest of approximately $223,000 on the term loan based on a 10-year amortization, provided the entire principal balance and accrued and unpaid interest on the term loan was due and payable in full on the maturity date of September 1, 2016. On July 30, 2014, using funds from the Credit Facility that the Company executed with AgStar, the Company repaid the entire outstanding balance of our credit facilities under the Sixth Amended and Restated Master Loan Agreement dated May 17, 2013 with AgStar.

Revolving Term Loan

The Company had a three-year revolving term loan commitment in the amount of $18.5 million, under which AgStar agreed to make periodic advances to the Company up to this original amount until September 1, 2016.

On July 29, 2014, the Company entered into a new master loan agreement and related loan documents (the “Credit Facility”) the with AgStar Financial Services, FCLA (“AgStar”). The Credit Facility provides the Company with a new comprehensive revolving term loan commitment in the amount of $28 million (the “Revolving Term Loan”), under which AgStar agreed to make one or more advances to the Company for use by the Company to repay the Company's debt currently outstanding with AgStar, provide a loan financing to Agrinatural Gas, LLC, the Company's indirect subsidiary, provide working capital to the Company, and pay fees and expenses in connection with the Company's refinancing. Following the loan closing, the Company had approximately $7.5 million outstanding on the Revolving Term Loan.

Amounts borrowed by the Company under the Revolving Term Loan and repaid or prepaid may be re-borrowed at any time prior to the March 1, 2022 maturity date. Under the terms of the Credit Facility, the Revolving Term Loan commitment is scheduled to decline by $3.5 million annually, beginning on March 1, 2015 and each anniversary date thereafter. Interest on the Revolving Term Loan accrues at a variable rate equal to 3.25% above the One-Month London Interbank Offered Rate (“LIBOR”) Index rate. The Company may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The Company also agreed to pay an unused commitment fee on the unused portion of the Revolving Term Loan commitment at the rate of 0.50% per annum. The Revolving Term Loan is subject to a prepayment fee for any prepayment on the Term Loan prior to July 1, 2016 due to refinancing. The Credit Facility contains customary covenants. The loan is secured by substantially all of the Company assets including a subsidiary guarantee.

As part of the Credit Facility closing, we entered into an Administrative Agency Agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the AgStar loans and was appointed the administrative agent for the purpose of servicing the loans. As a result, CoBank will act as the agent for AgStar with respect to the Credit Facility.

The Company had a note payable to a lending institution for the construction of the pipeline assets of Agrinatural. The note was initially due in December 2011, however, was subsequently converted in February 2012 to a term loan with a three year repayment period. During November 2013, the note payable was refinanced with the lending institution with additional borrowings of approximately$759,000 being made. Amounts outstanding on the term loan were to bear interest at 5.29%, payable monthly, with a maturity in December 2016. The term loan was secured by substantially all assets of Agrinatural. The note was paid off in full on July 29, 2014 by Agrinatural.

Subordinated Convertible Debt

On May 17, 2013, the Company’s Board of Governors loaned the Company approximately $1.4 million as part of the subordinated convertible debt offering. An additional $3.7 million was raised as part of a subordinated convertible debt offering during September 2013. The convertible secured debt was subordinated to the AgStar debt. The notes were to bear interest at 7.25% and were due in October 1, 2018. On October 1, 2014, or immediately prior to the sale of all or effectively all of the Company assets, each note was convertible into Class A stock at a rate of $0.30 per Class A unit. The Company reserved the right to issue Class B units upon conversion if the principal balance of the convertible debt exceeded the authorized Class A units at the conversion date. At the issuance, each debt holder had the option to convert to Class A units. As a result, holders elected to convert $934,500 in September 2013 for 3,115,000 Class A units.

On May 2, 2014, the Company issued a notice that the Company intended to redeem all of the outstanding principal amount of the subordinated convertible notes on July 1, 2014. The announced redemption was pursuant to the Company's "optional redemption" right in the indenture governing the notes. The outstanding principal balance of $4,143,000, could be redeemed at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest to, but excluding, the redemption date. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their notes into capital units of the Company at a conversion rate of $0.30 per unit.

As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of $3,936,000 of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion and redeemed the remaining $207,000 of the Notes at par value. In addition, on the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture. Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.

Estimated annual maturities of debt at July 31, 2014 are as follows based on the most recent debt agreements:

2015

$

955,752

2016

410,383

2017

404,207

2018

336,341

2019

7,809,647

After 2019

812,029

Total long-term debt

$

10,728,359

Related Party Demand Promissory Note

Agrinatural Gas, LLC was loaned $500,000 from Granite Falls Energy, LLC, a related party, during July 2014. The demand promissory note accrued interest at 5.29% and payment was due in full on or before July 31, 2014. Agrinatural Gas, LLC paid the balance in full, including accrued interest, in July 2014.

At July 31, 2014, the Company had basis contracts for forward corn purchase commitments for approximately 2,898,000 bushels for deliveries through January 2015.

At July 31, 2014, the Company had forward contracts to sell approximately $12,812,000 of ethanol for various delivery periods from August 2014 through March 2015 which approximates 19% of its anticipated ethanol sales during that period.

At July 31, 2014, the Company had forward contracts to sell approximately $2,042,000 of distillers grains for delivery in August 2014 through March 2015 which approximates 15% of its anticipated distillers grain sales during that period.

At July 31, 2014, the Company has natural gas agreements with a minimum purchase commitment of approximately 1.6 million MMBTU per year until October 2014.

8. MEMBERS’ EQUITY

The Company is authorized to issue 80,000,000 capital units, of which 65,000,000 have been designated Class A units and 15,000,000 have been designated as Class B units. Members of the Company are holders of units who have been admitted as members and who hold at least 2,500 units. Any holder of units who is not a member will not have voting rights. Transferees of units must be approved by our board of governors to become members. Members are entitled to one vote for each unit held. Subject to the Member Control Agreement, all units share equally in the profits and losses and distributions of assets on a per unit basis.

On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion. Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding as of July 31, 2014. On October 31, 2013, there were 49,812,107 Class A units issued and outstanding and 15,000,000 Class B units issued and outstanding, for an aggregate total of 64,812,107.

9. LEASES

The Company leases equipment, primarily rail cars, under operating leases through 2017. Rent expense for these leases was approximately $503,000 and $1,327,000 for the three and nine months ended July 31, 2014, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We prepared the following discussion and analysis to help readers better understand our financial condition, changes in our financial condition, and results of operations for the three and nine month periods ended July 31, 2014, compared to the same periods of the prior fiscal year. This section should be read in conjunction with the condensed consolidated unaudited financial statements and related notes in Item 1 of this report and the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2013.

Disclosure Regarding Forward-Looking Statements

This report contains historical information, as well as forward-looking statements regarding our business, financial condition, results of operations, performance and prospects. All statements that are not historical or current facts are forward-looking statements. You can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would,” and similar expressions intended to identify forward-looking statements. Forward-looking statements are subject to a number of known and unknown risks, uncertainties and other factors, many of which may be beyond our control, and may cause actual results, performance or achievements to differ materially from those projected in, expressed or implied by forward-looking statements. Certain of these risks and uncertainties are described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended October 31, 2013 and in this Form 10-Q. We do not undertake any duty to update forward-looking statements after the date they are made or to conform forward-looking statements to actual results or to changes in circumstances or expectations. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements. We caution you not to put undue reliance on any forward-looking statements, which speak only as of the date of this report. You should read this report and the documents that we reference in this report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we currently expect. We qualify all of our forward-looking statements by these cautionary statements.

Available Information

Our website address is www.heronlakebioenergy.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available, free of charge, on our website under the link “SEC Filings,” as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. The contents of our website are not incorporated by reference in this Quarterly Report on Form 10-Q.

Our ethanol plant has a nameplate capacity of 50 million gallons per year and a permitted capacity of approximately 59.2 million gallons per year. We are currently operating above our stated nameplate capacity and intend to continue to take advantage of the additional production allowed pursuant to our permit as long as we believe it is profitable to do so.

On July 1, 2014, the Company redeemed all of the outstanding 7.25% Subordinated Secured Notes due 2018 (the "Notes"), approximately $4,140,000 aggregate principal amount, by issuing 13,120,000 Class A units of the Company to the holders of approximately $3,936,000 principal amount of the Notes that elected conversion of the principal to units and paid cash to redeem the remaining $207,000 principal amount of the Notes. On the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture. The Company paid the cash redemption and accrued and unpaid interest from its cash on-hand. Details of redemption of the Notes is provided below in the section below entitled "PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness".

On July 29, 2014, the Company entered into an intercompany loan agreement and related loan documents (the “Loan Agreement”) with Agrinatural Gas, LLC (“Agrinatural”). Agrinatural is a pipeline company formed to construct, own, and operate a natural gas pipeline that provides natural gas to the Company’s ethanol plant through a connection with the natural gas pipeline facilities of Northern Border Pipeline Company in Cottonwood County, Minnesota. The Company owns 73% of Agrinatural through the Company’s wholly-owned subsidiary HLBE Pipeline Company, LLC. The remaining

27% is owned by Rural Energy Solutions, LLC. Under the Loan Agreement, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural (the "Agrinatural Loan") for use by Agrinatural to repay its outstanding debt and provide working capital to Agrinatural. Details of Loan Agreement with Agrinatural and the Agrinatural Loan are provided below in the section below entitled "PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness".

On July 29, 2014, the Company entered into a new master loan agreement and related loan documents (the "Credit Facility") the with AgStar Financial Services, FCLA ("AgStar"). The Credit Facility provides the Company with a new comprehensive revolving term loan commitment in the amount of $28 million (the "Term Revolving Loan"). Following the loan closing, we had approximately $7.5 million outstanding on the Term Revolving Loan under the Credit Facility which was primarily used to pay off our outstanding debt to AgStar under our prior master loan agreement and fund the Agrinatural Loan. The changes to our credit facilities and the loan to Agrinatural are described in more detail below in the section entitled "PART I - Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources; Indebtedness".

In July 2013, Granite Falls Energy, LLC ("Granite Falls" or "GFE") acquired a controlling interest in the Company from Project Viking, L.L.C. ("Project Viking"). GFE, now a related party, owns an ethanol plant located in Granite Falls, Minnesota. As of September 15, 2014, GFE owns approximately 50.6% of our outstanding membership units, a decrease from its prior ownership percentage of 60.8% due to our issuance of units as part of the redemption of the Notes. Notwithstanding this dilution, GFE retained its right to appoint five (5) of the nine (9) governors to our board of governors under our member control agreement as it continues to own a majority of the Company.

In July 2013, the Company also entered into a Management Services Agreement with GFE. Under the Management Services Agreement, GFE agreed to supply its own personnel to act as our Chief Executive Officer, Chief Financial Officer, and Commodity Risk Manager. The initial term of the Management Services Agreement expires in July 2016, but automatically renews for successive one-year terms unless either party gives the other party written notice of termination prior to expiration of the then current term.

Our revenues are derived from the sale and distribution of our ethanol throughout the continental United States and in the sale and distribution of our distillers’ grains (DGS) locally, and throughout the continental United States. We have contracted with Eco-Energy, LLC to market all of our ethanol, Gavilon Ingredients, LLC to market our distillers grains and Renewable Products Marketing Group, LLC to market our corn oil.

The primary raw material used in the production of ethanol at our plant is corn. We generally do not have long-term, fixed price contracts for the purchase of corn. Rather, we typically purchase our corn directly from grain elevators, farmers, and local dealers within approximately 80 miles of Heron Lake, Minnesota.

The primary source of energy in our manufacturing process is natural gas. We have a facilities agreement with Northern Border Pipeline Company which allows us access to an existing interstate natural gas pipeline located approximately 16 miles north from our plant. We have a transportation agreement with Agrinatural, a pipeline company formed to construct, own, and operate the natural gas pipeline that provides natural gas to our ethanol plant. Our wholly-owned subsidiary, HLBE Pipeline Company, LLC, owns 73% of Agrinatural Gas.

We expect to have sufficient cash generated by continuing operations and current lines of credit to fund our operations. However, should we experience unfavorable operating conditions in the ethanol industry that prevent us from profitably operating the ethanol plant, we may need to seek additional funding.

Trends and Uncertainties Impacting Our Operations

Our current results of operation are affected and will continue to be affected by factors such as (a) volatile and uncertain pricing of ethanol and corn; (b) availability of corn that is, in turn, affected by trends such as corn acreage, weather conditions, and yields on existing and new acreage diverted from other crops; and (c) the supply and demand for ethanol, which is affected by acceptance of ethanol as a substitute for fuel, public perception of the ethanol industry, government incentives and regulation, and competition from new and existing construction, among other things.

The demand for ethanol is affected by what is commonly referred to as the “blending wall” which is the threshold at which the Renewable Fuel Standard (RFS) volume requirement exceeds the demand for E10 (10% ethanol and 90%gasoline) gasoline. E10 is the most common ethanol blend sold and the only blend the EPA has approved for use in all American automobiles. There is growing availability of E85 (85% ethanol and 15% gasoline) for use in flexible fuel vehicles. In addition, the industry has been working to introduce E15 to the retail market since the EPA issued final approval in 2012 for the sale and use of E15 ethanol blends in light duty passenger vehicles model year 2001 and newer. Since that time, our application with the EPA to register ethanol for use in making E15 has also been approved, as well as 81 other fuel manufacturers according to EPA data. However, wide spread adoption of E15 is hampered by regulatory and infrastructure hurdles in many states, as well as consumer acceptance. To date only thirteen states have approved the commercial sale of E15. As such, we do not anticipate that E15 will impact ethanol demand or pricing in the near term. Rather, management believes consumer acceptance of E15 and flex fuel vehicles, along with continued growth of E85, is necessary before ethanol can achieve any market growth beyond the blend wall. As industry production capacity reaches the blend wall, the supply of ethanol in the market may surpass the demand which in turn may negatively impact prices.

The RFS requires a certain amount of renewable fuels be used each year in the United States, however, the EPA can adjust the renewable volume obligation (RVO) in certain circumstances through its rulemaking authority. In November 2013, the EPA issued a proposed rule that would reduce the 2014 RVO to 13.0 billion gallons of corn-based renewable fuel. As proposed, the 2014 RVO would be 1.4 billion gallon below the statutory RVO for 2014 and 800 million gallons less than the 2013 RVO, marking the first time the corn-based renewable fuel and total renewable fuel RVOs have been set below the legislated target. The proposal was subject to a 60-day comment period which ended in January 2014 during which the EPA received over 340,000 public comments and drew strong opposition from biofuels groups. On August 22, 2014, the final 2014 RVO rule was sent by the EPA to the Office of Management and Budget (OMB) for review. As of this filing, the proposed final rule is not publicly available, however, EPA administrator Gina McCarthy has previously stated that the final 2014 RVO would include changes from the November proposal but neither she nor the EPA has elaborated on the degree of changes. The final rule is expected to be released sometime this fall, however, OMB has up to 90 days, or more if an extension is granted, to complete its interagency review. Until the final rule is published, management expects continued uncertainty for ethanol demand for 2014. Moreover, further delay in the release of the final rule also creates uncertainty in ethanol demand in 2015 as the delay in the 2014 rule will likely cause delay in the final 2015 rule, which is due by November 30, 2014. If the final rule includes a significant decrease in the 2014 RVO similar to the EPA's November proposed rule, demand for ethanol in 2015 and beyond could be reduced due to blenders' carryover of renewable fuel credits in excess of the RVO into future years.

High demand on the rail industry due to high volumes of corn, oil and coal rail shipments and a harsh winter that saw record cold and snow has resulted in significant industry-wide delays and logistical problems. These delays have caused many ethanol plants to slow or suspend production due to inability to secure railcars to transport their ethanol to market. Our plant has not experienced any material delays from the rail congestion problems. Recently, rail congestion and delays have lessened, however, industry concerns remain that the existing backlog will be resolved before anticipated record corn and soybean harvest place additional stress on the rail transportation network. Management believes that slower rail shipping may continue through late spring 2015 and may continue to impact ethanol producers unless rail shipping capacity increases to meet the increased demand. If rail delays and congestion continue, we may begin to see material impacts to our plant if we run out of ethanol storage capacity and we are forced to reduce or cease production.

Other factors that may affect our future results of operation include those factors below in our Results of Operations of this Form 10-Q and those discussed in “Item 1. Business” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended October 31, 2013, and in other filings we make with the Securities and Exchange Commission.

Results of Operations for the Three Months Ended July 31, 2014 and 2013

The following table shows summary information from the results of our operations and the approximate percentage of revenues, costs of goods sold, operating expenses and other items to total revenues in our Condensed Consolidated Statements of Operations for the three months endedJuly 31, 2014 and 2013.

Three Months Ended

Three Months Ended

July 31, 2014

%

July 31, 2013

%

Income Statement Data

(Unaudited)

(Unaudited)

Revenues

$

39,082,103

100.0

%

$

45,583,441

100.0

%

Cost of Goods Sold

30,790,088

78.8

%

41,523,283

91.1

%

Gross Profit

8,292,015

21.2

%

4,060,158

8.9

%

Selling, General, and Administrative Expenses

777,274

2.0

%

674,200

1.5

%

Operating Income

7,514,741

19.2

%

3,385,958

7.4

%

Other Expense, net

(639,121

)

(1.6

)%

(744,297

)

(1.6

)%

Net Income

6,875,620

17.6

%

2,641,661

5.8

%

Net Income Attributable to Noncontrolling Interest

89,866

0.2

%

87,168

0.2

%

Net Income Attributable to Heron Lake BioEnergy, LLC

$

6,785,754

17.4

%

$

2,554,493

5.6

%

Revenues

Approximately 99% of our revenues from operations come from three sources: sales of fuel ethanol, sales of distillers grains and sales of corn oil. The remaining miscellaneous other revenues are made up of incidental sales of syrup, a by-product of the ethanol production process, and revenues from Agrinatural. Revenues decreased by 14.3% for the three months endedJuly 31, 2014 as compared to the three months endedJuly 31, 2013 due primarily to decreases in the average prices received for our ethanol and distillers grains. Our results of operations will continue to be affected by volatility in the commodity markets. In the event that we experience a prolonged period of negative operating margins, our liquidity may be negatively impacted.

The following table shows the sources of our revenue for the three months endedJuly 31, 2014:

The following table shows the sources of our revenue for the three months endedJuly 31, 2013:

Amount

Percent of Total Revenues

Ethanol sales

$

36,417,998

79.9

%

Distillers grains sales

7,788,313

17.1

%

Corn oil sales

1,100,000

2.4

%

Miscellaneous other

277,130

0.6

%

Total Revenues

$

45,583,441

100.0

%

Ethanol

Net ethanol revenues were approximately $31.1 million during the three months endedJuly 31, 2014 compared to approximately $36.4 million during the three months endedJuly 31, 2013. The average price we received for our ethanol decreased by approximately 14.4% for the quarter endedJuly 31, 2014 as compared to the quarter endedJuly 31, 2013. However, the decrease in the price per gallon we received was slightly mitigated by an increase of approximately 0.3% more gallons of ethanol sold during the three months endedJuly 31, 2014 as compared to the three months endedJuly 31, 2013. There were no ethanol derivative gains or losses during the three months endedJuly 31, 2014 and 2013.

Management attributes the drop in ethanol prices to continuing lower corn prices, which impacts the market price of ethanol. Management anticipates that ethanol prices will continue to change in relation to changes in corn and energy prices. However, ethanol prices have been somewhat buoyed by continuing rail delays and a stronger export market which has resulted in tighter ethanol inventories. Rail congestion and delays continue due to increased demand and rail infrastructure limitations. Management anticipates that current backlogs will continue through spring next year or longer if the rail system experiences further stress due to the anticipated record grain harvest this fall. Management anticipates that ethanol prices will continue to face downward pressures through the remainder of 2014 due to the anticipated record grain harvest and anticipated lower corn prices. Despite these downward pressures, ethanol margins have remained favorable as the decline in corn prices has outpaced the decline in ethanol prices. Management anticipates that the favorable price spread between ethanol and corn will continue until the supply and demand balance for ethanol returns to more traditional levels.

Distillers Grains

Total sales of distillers grains during the three months endedJuly 31, 2014 were approximately $6.9 million compared to sales of $7.8 million during the three months endedJuly 31, 2013. The average distillers grains price decreased27.4% for the quarter endedJuly 31, 2014 as compared to the quarter endedJuly 31, 2013, which was partially mitigated by an increase of approximately 21.6% in distillers grains sold during the three months endedJuly 31, 2014 as compared to the three months endedJuly 31, 2013.

Management believes these lower distillers grains prices are primarily a result of the decline in the price of corn, as market prices for distillers grains tend to move directionally with the prices of other livestock feed products. We anticipate that the market price of our dried distillers grains will continue to trend lower tracking changes in the price of corn. In addition, if plants that have suspended or reduced production due to rail shipping bottlenecks are able to resume or increase production, distillers grains prices may be negatively impacted.

Further recent changes in export demand for distillers grains by China have negatively impacted distillers grains prices. In June 2014, China stopped issuing permits for the import of distillers dried grains from the US due to the presence of a unapproved GMO corn trait in some distillers grains shipments. The GMO trait has been approved in the US and a number of other countries but not in China. At present, there is no reliable method to test for this trait in distillers grains and no mechanism in the US to meet other certification requirements imposed by China for imports of distillers grains that may contain the unapproved GMO trait. The ethanol industry and US government are examining China's actions to determine appropriate responses as many in the industry and trade community believe these actions are due more to protecting China's own farmers than concerns regarding this GMO trait. Management cannot estimate the effect China's actions will have on the overall distillers grains market long term. This could reduce distillers grains prices in the domestic market by decreasing worldwide demand for distillers grains.

Corn oil sales for the three months endedJuly 31, 2014 were down approximately 16.9% compared to corn oil sales for the same period in 2013. Management attributes this decline to decreased corn oil prices which is due primarily to lower corn prices and excess supplies of corn oil relative to demand. Management expects continued lower corn oil prices due to oversupply. Management believes the oversupply in the corn oil market stems, in part, from the diminished demand for corn oil from the biodiesel industry and the resumed production by ethanol plants that had suspended or reduced operations due to rail congestion. The biodiesel industry has been signficantly impacted by the expiration of the biodiesel blenders' tax credit and uncertainty regarding the biodiesel RVOs for 2014 under the RFS, which has resulting in declining demand for biodiesel. Corn oil prices could experience further decreases due to oversupply unless additional demand can be created.

Cost of Goods Sold

Our costs of sales include, among other things, the cost of corn and natural gas (which are the two largest components of costs of sales), as well as processing ingredients, electricity, and wages, salaries and benefits of production personnel. Our costs of sales as a percentage of revenues were 78.8% and 91.1% for the three months endedJuly 31, 2014 and the three months endedJuly 31, 2013, respectively. Our gross margin for the three months endedJuly 31, 2014increased to 21.2% from 8.9% for the three months endedJuly 31, 2013.

Corn

The volume of corn we processed was up 6.0% for the three months endedJuly 31, 2014 as compared to the same period of fiscal year 2013 due to reduced production in 2013 when margins were poor. Although corn prices trended upwards during the three months endedJuly 31, 2014, overall we experienced a decrease in corn prices of approximately 30.3% the same period of 2013. This decrease in corn price is largely attributable to the record 2013 corn harvest and sufficient local supplies. Management expects that corn prices will stay lower through the remainder of our fiscal year due to 2014 corn crop projections and that there will be adequate local supply for our plant operations. The USDA's Crop Production report published on August 12, 2014 increased the USDA's prior projections for US corn production to 14.0 billion bushels for the 2014 growing season, with 1.3 billion bushels of corn production forecasted for Minnesota. If realized, this would be the highest corn production on record for the US. Management expects there to be an adequate corn supply available in our area to operate the ethanol plant and that prices during our 2014 fiscal year may be lower due to plentiful supply. However, corn prices may be volatile in the future depending on weather, world supply and demand, current and anticipated stocks, and other factors.

We had losses related to corn derivative instruments of $125,461 for the three months endedJuly 31, 2014, which increased cost of sales, compared to no gains or losses related to corn derivative instruments for the same period of 2013. We recognize the gains or losses that result from the changes in the value of our derivative instruments from corn in cost of goods sold as the changes occur. As corn prices fluctuate, the value of our derivative instruments are impacted, which affects our financial performance. We anticipate continued volatility in our cost of goods sold due to the timing of the changes in value of the derivative instruments relative to the cost and use of the commodity being hedged.

Natural Gas

For the three months endedJuly 31, 2014, we experienced an increase of approximately 23.3% in our overall natural gas costs compared to the same period of 2013 due to higher prices. Management anticipates that natural gas prices will continue to hold steady. However, if the natural gas industry experiences production problems, supply disruptions from hurricane activity, or if there are large increases in natural gas demand that limits the amount of gas that can be injected into storage ahead of winter demand, we may experience significant increases in natural gas prices.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses include wages, salaries and benefits of administrative employees at the plant, insurance, professional fees and similar costs. Selling, general and administrative expenses for the three months endedJuly 31, 2014increased15.3% compared to the three months endedJuly 31, 2013. Despite the significant increase from period to period, as a percentage of total revenues selling, general and administrative expenses only increased slightly to 2.0% for the three months endedJuly 31, 2014 , as compared to 1.5% for three months endedJuly 31, 2013. Although we are focused on increasing operating efficiencies, these expenses generally do not vary with the level of production at the plant.

Our income from operations for the three months endedJuly 31, 2014 was approximately $7.5 million compared to a income of $3.4 million for the same period 2013. This increase resulted from increased production and the improvement of our net margin between the price we received for ethanol and the cost of corn and natural gas used in manufacturing.

Other Expense, Net

Other expense, net consists primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense, which was down 13.1% for the three months endedJuly 31, 2014, as compared to the three months endedJuly 31, 2013, is

dependent on the balances outstanding and on interest rates, including an additional 2% default interest rate we accrued on our AgStar loans during the three months endedJuly 31, 2013. This default rate was not in effect during the three months endedJuly 31, 2014. Interest expense for the three months endedJuly 31, 2014, includes a write off of deferred financing costs of approximately $329,000 for the subordinated convertible debt and refinancing our senior debt facilities.

Results of Operations for the Nine Months Ended July 31, 2014, and 2013

The following table shows summary information from our Condensed Consolidated Statements of Operations for the nine months ended July 31, 2014 and 2013.

Nine Months Ended

Nine Months Ended

July 31, 2014

%

July 31, 2013

%

Income Statement Data

(Unaudited)

(Unaudited)

Revenues

$

119,141,711

100.0

%

125,203,672

100.0

%

Cost of Goods Sold

96,066,933

80.6

%

119,568,050

95.5

%

Gross Profit

23,074,778

19.4

%

5,635,622

4.5

%

Selling, General, and Administrative Expenses

2,460,719

2.1

%

2,537,919

2.0

%

Operating Income

20,614,059

17.3

%

3,097,703

2.5

%

Other Expense, net

(1,407,792

)

(1.2

)%

(2,206,906

)

(1.8

)%

Net Income

19,206,267

16.1

%

890,797

0.7

%

Net Income Attributable to Noncontrolling Interest

273,010

0.2

%

254,999

0.2

%

Net Income Attributable to Heron Lake BioEnergy, LLC

$

18,933,257

15.9

%

$

635,798

0.5

%

Revenues

The following table shows the sources of our revenue for the nine months ended July 31, 2014:

The following table shows the sources of our revenue for the nine months ended July 31, 2013:

Amount

Percent of Total Revenues

Ethanol sales

$

95,470,167

76.3

%

Distillers grains sales

25,817,466

20.6

%

Corn oil sales

2,900,000

2.3

%

Miscellaneous other

1,016,039

0.8

%

Total Revenues

$

125,203,672

100.0

%

Revenues decreased slightly, down by 4.8% for the nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013. However, our gross margin improved dramatically comparing the nine months ended July 31, 2014 to the same period in 2013 due to increases in the volume of ethanol sold and significant decreases in the average price per bushel of corn processed.

Net ethanol revenues during the nine months ended July 31, 2014 were approximately 1.9% less than net ethanol revenues for the nine months ended July 31, 2013. Additionally, the average price we received for our ethanol for nine months ended July 31, 2014 decreased by approximately 11.9% from the average price received for nine months ended July 31, 2013 and volume of ethanol sold increased by 11.3% from period to period. There were no ethanol derivative gains or losses during the nine months ended July 31, 2014 and 2013.

Total sales of distillers grains during the nine months ended July 31, 2014 were down approximately 15.2% from total distillers grains sales during the nine months ended July 31, 2013. In addition, the average price for our distillers grains for the nine months ended July 31, 2014 decreased 25.2% compared to the same period of 2013. The decrease in the average price was partially offset by an increase of 13.4% in the total volume of distillers grains sold during the nine months ended July 31, 2014 compared to the same period of 2013.

Total sales of corn oil during the nine months ended July 31, 2014 were down approximately 14.2% from total corn oil sales during the nine months ended July 31, 2013. This decrease was primarily due to a decrease in the average price for our corn oil for the nine months ended July 31, 2014 compared to the same period of 2013.

Cost of Goods Sold

Our costs of sales include, among other things, the cost of corn used in ethanol and distillers grains production (which is the largest component of costs of sales); natural gas, processing ingredients and electricity. Over the last nine months, on average we have used approximately 1.8 million bushels of corn per month at the plant.

The per bushel cost of corn decreased approximately 30.5% in nine months ended July 31, 2014 as compared to the nine months ended July 31, 2013. We had a gain related to corn derivative instruments of $206,744 for the nine months ended July 31, 2014. There were no corn derivative gains or losses during the nine months ended July 31, 2013.

Selling, General and Administrative Expenses

Selling, general and administrative expense for the nine months ended July 31, 2014decreased approximately 3.0% compared to our selling, general and administrative expenses for the nine months ended July 31, 2013 due primarily to fees related to the planned plant asset sale, and the sale of the Lakefield Farmers Elevator. These expenses represented 2.1% and 2.0% of total revenues for the nine months ended July 31, 2014 and 2013, respectively.

Other Expense, Net

Other expense, net consists primarily of interest expense. Interest expense consists primarily of interest payments on our credit facilities described below. Interest expense, which was down 35.4% for the nine months ended July 31, 2014, as compared to the nine months ended July 31, 2013, is dependent on the balances outstanding and on interest rates, including an additional 2% default interest rate we paid on our AgStar loans during the nine months ended July 31, 2013. Interest expense for the nine months ended July 31, 2014, includes a write off of deferred financing costs of approximately $329,000 for the subordinated convertible debt and refinancing our senior debt facilities.

Changes in Financial Condition for the Nine Months Ended July 31, 2014

The following table highlights our financial condition at July 31, 2014 and October 31, 2013:

July 31, 2014

October 31, 2013

Current Assets

$

14,667,256

$

7,849,244

Total Assets

$

66,700,095

$

60,793,917

Current Liabilities

$

6,149,846

$

5,061,910

Long-Term Debt

$

9,772,607

$

28,181,155

Members' Equity Attributable to Heron Lake BioEnergy, LLC

$

50,011,532

$

27,142,275

Non-Controlling Interest

$

766,110

$

408,577

Our total current assets increased by approximately $6.8 million at July 31, 2014 compared to October 31, 2013. This increase is due to an increase in trade accounts receivable of approximately $6.1 million at July 31, 2014 as compared to October 31, 2013, which was slightly offset by a decrease of approximately $682,000 in prepaid expenses at July 31, 2014 compared to October 31, 2013. Trade accounts receivable increased because we were awaiting payment for a larger quantity of our products at July 31, 2014 compared to October 31, 2013 due to our change of ethanol marketers from Gavilon, LLC to Eco-Energy, LLC in November 2013. We also experienced a slight increase in cash on hand of approximately $600,000 and inventory of approximately $600,000 at July 31, 2014 as compared to October 31, 2013.

Total current liabilities totaled approximately $6.1 million at July 31, 2014, an increase of approximately $1.1 million from October 31, 2013. This increase was primarily due to an increase in our accounts payable of approximately $3.4 million at July 31, 2014 as compared to October 31, 2013, which was partially offset by a decrease of $2.4 million current liabilities of our long-term debt. The increase in our accounts payable is due to the termination of our corn supply agreement with Gavilon, our former procurement contractor. Since terminating the corn supply agreement, we buy our own corn and are no longer netting corn purchases with sales of ethanol and distillers grain. The decrease in the current liability of our long-term debt was a result of the redemption of our subordinated convertible debt effective July 1, 2014.

Our long-term debt decreased approximately $18.4 million from October 31, 2013 to July 31, 2014. The decrease is due to payments on our AgStar debt facilities and the conversion and redemption of the subordinated convertible debt as discussed above.

Members’ equity attributable to Heron Lake BioEnergy, LLC increased approximately $22.9 million at July 31, 2014 as compared to October 31, 2013. The increase was directly related to the net income attributable to the Company of approximately $18.9 million for the nine months ended July 31, 2014 and the conversion of approximately $3.9 million in principal amount into Class A units of the Company when the Company redeemed its subordinated convertible debt effective July 1, 2014.

Our principal sources of liquidity consist of cash provided by operations, cash and equivalents on hand, and available borrowings under our credit facility with AgStar. Our principal uses of cash are to pay operating expenses of the plant and to make debt service payments on our long-term debt.

Cash Flows

As of July 31, 2014, we had cash of approximately $1.2 million, current assets of approximately $14.7 million and total assets of approximately $66.7 million. The following table summarizes our sources and uses of cash and equivalents from our unaudited condensed consolidated statements of cash flows for the periods presented:

Nine Months Ended July 31,

2014

2013

Net cash provided by operating activities

$

20,195,686

$

2,638,461

Net cash (used in) provided by investing activities

$

(2,698,762

)

$

3,459,945

Net cash used in financing activities

$

(16,888,371

)

$

(5,729,003

)

Net increase in cash

$

608,553

$

369,403

Operating Cash Flows. During the nine months ended July 31, 2014, operating activities provided approximately $20.2 million in cash, as compared to $2.6 million for the nine months ended July 31, 2013. This improvement consists primarily of generating a net income of approximately $19.2 million for the nine months ended July 31, 2014 as compared to a net income of $0.9 million for the same period of 2013. Currently, our capital needs are being adequately met through cash flows from our operating activities and our currently available credit facilities.

Investing Cash Flows. During the nine months ended July 31, 2014, we had capital expenditures of approximately $2.7 million. In the same period in 2013, we received approximately $3.7 million attributable to proceeds from the sale of grain storage assets.

Financing Cash Flows. During the nine months ended July 31, 2014, we used approximately $16.9 million in cash in financing activities which consisted of payments on our long term debt of $16.7 million and payments on the convertible subordinated debt of $207,000. In the same period in 2013, we made payments of $13.9 million on our long term debt and $480,000 on our line of credit and had proceeds of $520,000 from long term debt.

Indebtedness

Refinancing of AgStar Credit Facilities

On July 29, 2014, we entered into a new comprehensive credit facility with AgStar Financial Services, FCLA (“AgStar”). The new comprehensive credit facility consists of a $28 million term revolving loan with a maturity date of March 1, 2022. In exchange for this new comprehensive credit facility, we executed a mortgage in favor of AgStar covering all of our real property and granted AgStar a security interest in all of our equipment and other assets. Our new credit facility with AgStar is subject to numerous covenants requiring us to maintain various financial ratios.

At the time we executed the new credit facility with AgStar, we repaid the entire outstanding balance of our prior credit facilities with AgStar. Our credit facilities with AgStar prior to the payoff included our term note and a revolving term note. At the loan closing, we paid off the $7.5 million balance of the revolving term note. There was no outstanding balance on the prior AgStar term note at loan closing. AgStar canceled its prior mortgage and security interest in all of our assets. We currently have no further obligations under our prior AgStar credit facilities. For additional information related to the repayment of the term note and a revolving term note under our prior AgStar master loan agreement, see Note 6 included herein as part of the Notes to the Condensed Consolidated Unaudited Financial Statements.

We have a total of $28 million available under the new revolving term loan with AgStar. Interest on this loan accrues at 3.25% above the One-Month London Interbank Offered Rate (LIBOR) Index rate. The interest rate is subject to weekly adjustment. We may elect to enter into a fixed interest rate on this loan at various times throughout the term of the loan as provided in the loan agreements. The maximum principal amount of this loan decreases by $3.5 million annually starting on March 1, 2015 and continuing thereafter until maturity. In the event any amount is outstanding on this loan in excess of the new credit limit, we agreed to repay principal on the loan until we reach the new credit limit. We agreed to pay an annual fee of 0.5% of the unused portion of this loan. The revolving term loan is subject to a prepayment fee for any prepayment on the Term Loan prior to July 1, 2016 due to refinancing. As of July 31, 2014, we had approximately $7.5 million outstanding on this loan and the interest rate was 3.41% per year and approximately $20.5 million available to be drawn.

For additional information related to the the revolving term note, see Note 6 included herein as part of the Notes to the Condensed Consolidated Unaudited Financial Statements.

Administrative Agency Agreement

As part of the Credit Facility closing, we entered into an Administrative Agency Agreement with CoBank, ACP (“CoBank”). CoBank purchased a participation interest in the AgStar loan and was appointed the administrative agent for the purpose of servicing the loans.

Subordinated Convertible Debt

On May 2, 2014, we issued a notice to U.S. Bank that we intended to redeem all of the outstanding 7.25% Secured Subordinated Notes due 2018 (the “Notes”) on July 1, 2014. The announced redemption was pursuant to the Company's "optional redemption" right in the indenture governing the notes. A notice of the redemption was mailed to Note holders by the trustee on May 23, 2014. The outstanding principal balance of $4.1 million would be redeemed at a redemption price equal to 100% of the aggregate principal amount plus accrued and unpaid interest to interest to, but excluding, the

redemption date. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their Notes into capital units of the Company at a conversion rate of $0.30 per unit.

As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of approximately $3.9 million of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion and redeemed the remaining $207,000 of the Notes at par value. In addition, on the same day, the Company paid accrued and unpaid interest through July 1, 2014 to all note holders, including those electing conversion, per the terms of the Notes and the Indenture.

Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.

Other Credit Arrangements

In addition to our primary credit arrangement with AgStar and our subordinated convertible debt, we have other material credit arrangements and debt obligations.

In October 2003, we entered into an industrial water supply development and distribution agreement with the City of Heron Lake, Jackson County, and Minnesota Soybean Processors. In consideration of this agreement, the Company and Minnesota Soybean Processors are allocated equally the debt service on $735,000 in water revenue bonds that were issued by the City to support this project that mature in February 2019. The parties have agreed that prior to the scheduled expiration of the agreement, they will negotiate in good faith to replace the agreement with a further agreement regarding the

wells and related facilities. In May 2006, we entered into an industrial water supply treatment agreement with the City of Heron Lake and Jackson County. Under this agreement, we pay monthly installments over 24 months starting January 1, 2007 equal to one years' debt service on approximately $3.6 million in water revenue bonds, which will be returned to the Company if any funds remain after final payment in full on the bonds and assuming we comply with all payment obligations under the agreement. As of July 31, 2014, there was a total of $2.4 million in outstanding water revenue bonds. We classify our obligations under these bonds as assessments payable. The interest rates on the bonds range from 0.50% to 8.73%.

To fund the purchase of the distribution system and substation for the plant, we entered into a loan agreement with Federated Rural Electric Association pursuant to which we borrowed $600,000 by a secured promissory note. Under the note the Company is required to make monthly payments to Federated Rural Electric Association of $6,250 consisting of principal and an annual fee of 1% beginning on October 10, 2009. In exchange for this loan, Federated Rural Electric Association was granted a security interest in the distribution system and substation for the plant. The balance of this loan at July 31, 2014 was $237,500.

We financed our corn oil separation equipment from the equipment vendor. We pay approximately $40,000 per month on this debt, conditioned upon revenue generated from the corn oil separation equipment. The monthly payment includes implicit interest of 5.57% until maturity in May 2015. The note is secured by the corn oil separation equipment. The balance of this loan at July 31, 2014 was approximately $263,400.

We also have a note payable to the minority owner of Agrinatural Gas, LLC in the amount of $300,000 at July 31, 2014. Interest on the note is 5.43% and the note has a maturity date in October 2014.

The Company had a note payable in connection with the construction of its pipeline assets. This loan was initially due in December 2011, but was converted in February 2012 to a term loan with a three-year repayment period. In November 2013, the note payable was refinanced with the lending institution with additional borrowings of approximately $759,000 being made. The note was paid off in full on July 29, 2014 by Agrinatural using funds loaned to Agrinatural by the Company described below.

Loans to Agrinatural

Loan from the Company

On July 29, 2014, the Company entered into an intercompany loan agreement and related loan documents with Agrinatural. Under the loan agreement, the Company agreed to make a five-year term loan in the principal amount of $3.05 million to Agrinatural for use by Agrinatural to repay approximately $1.4 million of its outstanding debt and provide approximately $1.6 million of working capital to Agrinatural. Interest on the term loan accrues at a variable rate equal to the One-Month LIBOR rate plus 4.0%, with the interest rate capped and not to exceed 6.0% per annum. The interest rate

is subject to weekly adjustment. Prior to January 1, 2015, Agrinatural is required to pay only monthly interest on the term loan. Commencing January 1, 2015, Agrinatural is required to make monthly installments of principal plus accrued interest. The entire principal balance and accrued and unpaid interest on the term loan is due and payable in full on December 1, 2019.

In exchange for the Loan Agreement, the Agrinatural executed a Security Agreement granting the Company a first lien security interest in all of Agrinatural's equipment and assets and a Collateral Assignment assigning the Company all of Agrinatural's interests in its contracts, leases, easements and other agreements. In addition, Rural Energy Solutions, LLC, the minority owner of Agrinatual ("RES"), executed a guarantee under which RES guaranteed full payment and performance of 27% of Agrinatural's obligations to the Company.

Agrinatural was loaned $500,000 from Granite Falls Energy, LLC, which owns approximately 50.6% of our outstanding membership units, during July 2014. The demand promissory note accrued interest at 5.29% and payment was due in full on or before July 31, 2014. Agrinatural paid the balance full, including accrued interest, on July 29, 2014.

Critical Accounting Estimates

Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. We believe that of our significant accounting policies summarized in Note 1 to our condensed financial statements included with this Form 10-Q. At July 31, 2014, our critical accounting estimates continue to include those described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2013. Management has not changed the method of calculating and using estimates and assumptions in preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to the impact of market fluctuations associated with interest rates and commodity prices as discussed below. We have no exposure to foreign currency risk as all of our business is conducted in U.S. Dollars. We use derivative financial instruments as part of an overall strategy to manage market risk. We use cash, futures and option contracts to hedge changes to the commodity prices of corn, ethanol and natural gas. We do not enter into these derivative financial instruments for trading or speculative purposes, nor do we designate these contracts as hedges for accounting purposes pursuant to the requirements of Generally Accepted Accounting Principles ("GAAP").

Interest Rate Risk

We are exposed to market risk from changes in interest rates. Exposure to interest rate risk results primarily from our credit facilities with AgStar. The specifics of these credit facilities are discussed in greater detail in “Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Indebtedness.”

Below is a sensitivity analysis we prepared regarding our income exposure to changes in interest rates. The sensitivity analysis below shows the anticipated effect on our income from a 10% adverse change in interest rates for a one-year period.

Outstanding Variable Rate Debt at July 31, 2014

Interest Rate at July 31, 2014

Interest Rate Following 10% Adverse Change

Approximate Adverse Change to Income

$

7,486,628

3.41%

3.76%

$26,203

Commodity Price Risk

We seek to minimize the risks from fluctuations in the prices of raw material inputs, such as corn and natural gas, and finished products, such as ethanol and distillers grains, through the use of hedging instruments. In practice, as markets move, we actively manage our risk and adjust hedging strategies as appropriate. Although we believe our hedge positions accomplish an economic hedge against our future purchases and sales, management has chosen not to use hedge accounting, which would match the gain or loss on our hedge positions to the specific commodity purchase being hedged. We are using fair value accounting for our hedge positions, which means as the current market price of our hedge positions changes, the realized or unrealized gains and losses are immediately recognized in our cost of goods sold or as an offset to revenues. The immediate recognition of hedging gains and losses under fair value accounting can cause net income to be volatile from quarter to quarter due to the timing of the change in value of the derivative instruments relative to the cost and use of the commodity being hedged.

As corn prices move in reaction to market trends and information, our income statement will be affected depending on the impact such market movements have on the value of our derivative instruments. Depending on market movements, crop prospects and weather, these price protection positions may cause immediate adverse effects, but are expected to produce long-term positive growth for us.

A sensitivity analysis has been prepared to estimate our exposure to ethanol, corn and natural gas price risk. Market risk related to these factors is estimated as the potential change in income resulting from a hypothetical 10% adverse change in the fair value of our corn and natural gas prices and average ethanol price as of July 31, 2014, net of the forward and future contracts used to hedge our market risk for corn and natural gas usage requirements. The results of this analysis, which may differ from actual results, are as follows:

Estimated Volume Requirements for the next 12 months (net of forward and futures contracts)

Unit of Measure

Hypothetical Adverse Change in Price as of July 31, 2014

Annual Adverse Change to Income

Natural Gas

1,655,000

MMBTU

10.00

%

$809,000

Ethanol

52,500,000

Gallons

10.00

%

$10,395,000

Corn

20,050,000

Bushels

10.00

%

$6,416,000

Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

In connection with the preparation of this Quarterly Report on Form 10-Q, our Chief Executive Officer, Steve Christensen, and our Chief Financial Officer, Stacie Schuler, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2014. In making this evaluation, our management considered the matters relating to the previously reported material weaknesses and our remediation of those material weaknesses as discussed below. Although, we have either remediated or or implemented the activities we believe are necessary to remediate the material weaknesses in our internal control over financial reporting as of July 31, 2014, we have not yet finalized the testing of the operating effectiveness of our remediation activities. Therefore, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of July 31, 2014.

In our Annual Report on Form 10-K for the year ended October 31, 2013 and in our subsequent quarterly report on Form 10-Q for the quarters ended January 31, 2014, management concluded that our internal control over financial reporting was not effective for such period because of the following material weaknesses identified in such reports. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Financial Statement Close Process

We did not have adequate financial reporting and close procedures. As previously reported in our Form 10-K for the year ended October 31, 2013, during fiscal 2013, we experienced turnover in our finance group impacting our financial close process. In July 2013, the Company entered into a management agreement with Granite Falls Energy to provide, among other things, assistance with our finance and accounting functions. In addition, we have implemented enhanced procedures and controls to remediate this weakness.

Revenue Recognition

We did not maintain effective controls to ensure that revenues were recognized in accordance with generally accepted accounting principles. Specifically, effective controls were not designed and in place to ensure the completeness, accuracy and timeliness of pricing certain ethanol and distillers grains sales transactions. This control deficiency resulted in restatement adjustments to our interim condensed financial information for quarter ended July 31, 2012. In July 2013, the Company entered into a management agreement with Granite Falls Energy to provide, among other things, assistance with our finance and accounting functions. Subsequently, we have implemented new revenue recognition models and related internal controls to remediate this weakness.

Changes in Internal Control over Financial Reporting

Our management, including our principal executive officer and principal financial officer, have reviewed and evaluated any changes in our internal control over financial reporting that occurred during the quarter ended July 31, 2014. During the quarter ended July 31, 2014, management has completed implementation of the changes as described above in "Remediation of Previously Reported Material Weaknesses". Management believes the remediation measures that we have implemented have had a positive impact on our internal control over financial reporting and that the controls with respect to the financial statement close process and revenue recognition were appropriately designed at July 31, 2014. However, the timing of our testing and evaluation of the operating effectiveness of our internal controls limited management’s ability to conclude that such controls were operating effectively for a reasonable period of time prior to July 31, 2014. We anticipate that the testing and evaluation of the operating effectiveness of our internal controls will be completed by the time we file our annual report on Form 10-K for the fiscal year ended October 31, 2014.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time in the ordinary course of business, the Company may be named as a defendant in legal proceedings related to various issues, including workers’ compensation claims, tort claims, or contractual disputes. We are not currently involved in any material legal proceedings.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended October 31, 2013. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

On May 2, 2014, we issued a notice to U.S. Bank that we intend to redeem all of the 7.25% Secured Subordinated Notes due 2018, outstanding principal balance of $4.1 million (the “Notes”), on July 1, 2014. A notice of the redemption was mailed to Note holders by the trustee on May 23, 2014. The Company's obligation to pay the redemption price on the redemption date was subject to the right of the holders of the notes to elect to convert the principal amount of their notes into capital units of the Company at a conversion rate of $0.30 per unit.

As of the close of business on June 20, 2014, the last day to elect conversion, note holders holding an aggregate principal amount of approximately $3.9 million of Notes elected to convert their Notes into units of the Company. On July 1, 2014, the Company issued 13,120,000 Class A units of the Company to the holders of the Notes electing conversion per the terms of the Notes and the indenture.

Following the issuance of the Class A units described above, the Company has a total of 62,932,107 Class A units and 15,000,000 Class B units issued and outstanding, for an aggregate total of 77,932,107 units issued and outstanding.

The Class A Units issued in this transaction have not been registered under the Securities Act of 1933, as amended and may not be offered or sold in the United States in the absence of an effective registration statement or exemption from the registration requirements under the Act. The Class A units were issued solely to former holders of the Notes upon conversion pursuant to the exemption from registration provided under Section 3(a)(9) of the Act. This exemption is available to the Company because the units were exchanged by the Company with its existing security holders in accordance with the terms of the indenture governing the Notes with no commission or other remunerations being paid or given for soliciting such an exchange. Based on representations from each note holder, including a representation that each such recipient is an accredited investor, the Company believes that the issuance of the Class A units is also exempt from registration under Section 4(2) of the Act, as a transaction by an issuer not involving a public offering.

The following materials from Heron Lake BioEnergy’s Quarterly Report on Form 10-Q for the quarterly period ended July 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.**

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